Risk Is a Moving Target

What is the biggest risk you have ever taken in your life? Why did you take that risk? And what happened?

These were the three questions I asked in my global research last year. I wanted to gain a better understanding of women and risk-taking, in both their financial and personal lives. I interviewed 52 accomplished women around the world from diverse backgrounds, cultures, professions, and ages.

Although the report focuses on women and risk, many of its insights will no doubt apply to men as well. So what are the key findings and the most relevant implications for adviser-client discussions?

Finding 1: Risk Is a Moving Target

Risk tolerance is the result of a complex combination of factors for women. Even their mood affects their risk tolerance.

Comfort with risk varies as time passes. Something that didn’t feel risky at all 15 years ago might feel very risky today or the other way around. Women’s past experiences will shape how confident they are taking risks in the future.

Women can’t really define risk fully, but they know that risk is very personal. And it moves.

“Risk is a fact that can’t be ignored and can’t be fully controlled . . . It is a product of life’s momentum. And life’s momentum is also the mother of all opportunities. We would not want the world to be static. It is movement that creates both risk and opportunities.”

Implications

In the world of investing, standardized risk questionnaires are still the norm. The most pervasive question is “What is your risk tolerance?” Most investors check a box describing their risk tolerance as conservative, moderate, aggressive, or their equivalents.

But what is the risk that the investor tolerates? The assumption is that risk is short-term market volatility. We need to use a much wider definition.

It is risky when longer-term objectives are not met. To properly assess investment risk, investors need to look at their investment portfolio as a whole. It is no different with personal risks. To properly assess any personal risk, clients and advisers need to consider their personal world as a whole. What are the implications for overall life and welfare if they take the risk?

The adviser-client conversation needs to include a much broader discussion around risk, one that isn’t shy about exploring real-life past experiences. What type of risk did the client take? Why did they take that risk? What happened? Ask them to describe how they felt and how they responded every step of the way.

“The biggest risk I have ever taken? It’s a tie between 1) telling my father I was joining the military in 1980 and 2) deciding to study to be an air traffic controller. Both of my brothers had applied to join the military and when I attended one of their graduation ceremonies I was very attracted to the sense of order, the discipline and the hierarchy. In order and discipline you can expect things. If you do A, the reaction will always be B.

“One of the most crazy difficult jobs in the world is being an air traffic controller. At the time that I studied in the early 1980s the failure rate for the course was 90% for civilians and 75% for military. The way I looked at it . . . everyone arrives in the course knowing nothing. We were all in our early 20s and we were all equal. It is just about learning. I thought to myself ‘I bet I can do this.’ I was the only woman in the seven out of 25 people who successfully graduated in my class.”

Clearly, this is an investor personality that needs to understand what can be controlled and what can’t be controlled. What better basis could there be for a discussion about markets? Risk is a moving target, but Tremblay will want to pin it down as much as possible.

Advisers should ask their clients and prospects to share personal stories. We are gathering important data that will inform our risk assessment. Take notes. Clients will feel listened to, we will get to know them better, and we will be more compliant by making a solid attempt to gain a deeper understanding of their investor personality.

One person’s big risk is no risk at all to another. As an example, some people are comfortable speaking in public, while others would rather do anything but. Some people take financial risks by betting on a single stock or buying an apartment on the spur of the moment. Some people risk speaking out against injustice and saying “No” to their largest client.

Risk is relative both to the personality of the risk-taker and also to the environment at the time of the risk-taking.

I spoke with Kim Shannon, CFA, president and co-CIO of Sionna Investment Managers in Toronto:

“I was the Canadian CIO for Merrill Lynch during the 2000 tech bubble. A year after I had joined, our low risk value style of investing was underperforming the soaring benchmark by 20% over the prior year. It was challenging to stick with our approach, especially as the Global CIO called us and suggested we ‘do something’ to staunch the bleeding: that meant he wanted us to buy tech stocks that we were underweighted in. We kept our heads by focusing on the basics, re-reading some of the great value investing books and by having lunch with and commiserating with other value managers. We shared our bad relative performance and consoled ourselves that we were not uniquely wrong footed in our approach. We were vindicated in the fall of 2000 and all of 2001.”

Just as investment styles drift in and out of favor, what feels risky to the individual investor can vary a lot based on the investing environment.

Implications

How many of us have had to talk our clients back from the cliff? I had a dreadful day in March 2009 during the financial crisis when I had seven clients try to go to cash.

I kept calm, cool, and collected for all seven conversations, realizing that their risk-tolerance was shifting. But I knew the world was not ending, and I also knew that a big conversation was needed. I talked them into waiting one more day before panic selling and described to them the overall picture. We discussed how they were reacting (understandably) to the short-term volatility and the environment of fear, and how that is human nature. But what was the reasonable thing to do?

The main thing that we needed to decide on was whether the prevailing investing environment was going to have a serious effect on their well-reasoned investment plan that had been designed for the longer term. Did they agree that if they were to cash everything in, this would become a greater probability? What are the relevant risks of both scenarios?

Finding 3: Some Prepare to Take Their “Big Risk” and Some Just Jump In with the Sharks!

The Preparers have a strategy: They plant seeds of some kind, they hire a coach, they set money aside, or they start a side project.

The Leapers follow their instincts: They see an interesting looking roller coaster and just know it will all be okay.

Implications

Find out how your client or prospect prepares to take risks. What is their process? How did they make previous decisions to invest? Did they do a lot of research or did they just go with their gut feel? How did it work out for them? Get them talking.

Diana van Maasdijk, the co-founder and executive director of Equileap in Amsterdam, is a perfect example of a Leaper, which I’m guessing is why her company is called what it is.

“There have been many times in my life when I have made decisions based on my ‘gut feel’ but the most glaring example is when I quit my job in early 2016 to co-found Equileap. In the Netherlands many jobs have what is called a ‘forever contract,’ meaning it is difficult for a company to fire you. I left a hugely secure position with a good salary, car and benefits for what is essentially a leap of faith.

“I have felt strongly that gender equality is not happening quickly enough in corporations! I also know that money is power and we can use money to change things for the better. I realized that if I can provide investors with detailed data on gender equality they would be interested in directing their capital in this way. We have created a methodology for scoring 3,000 companies around the world based on 19 criteria around gender equality.

“People thought I was taking such a huge risk quitting my job because I am in my 40s and we are a family with three teenagers that needs two incomes. But somehow I knew it would be okay, and in fact, I am happy to say that so far it is working out!”

As a portfolio manager, I know that people who are passionate about their business or a specific cause will often want to put all their eggs in one basket. The idea of diversifying their portfolio won’t be at all sexy to a Leaper, but if we take the time to fully understand their history and their perspective, they will be more inclined to accept our professional advice.

Kate Hilton, a best-selling author in Toronto, is a perfect example of a Preparer:

“At age 38, I decided to start the novel that I’d always wanted to write. I hired a babysitter for three hours every Sunday afternoon. It took eighteen months to complete a first draft of The Hole in the Middle, and another eighteen to rewrite it. After publication, my book spent 11 weeks on the bestseller list in Canada, and a US two-book deal soon followed.

“In financial terms, my life is more unpredictable than it used to be when I drew a salary. I’m comfortable with that trade-off, but it means that I need to diversify my income stream so that I’m not dependent on advances and royalties from my writing, which can be unpredictable and infrequent. I prioritize home ownership, and I work with a financial adviser.”

A Preparer personality is generally open to spending time and energy on their overall financial picture. They tend to be highly aware of risk and what might happen in the future. The more scenarios and spreadsheets the better.

Whether our clients and prospects are Leapers or Preparers, they need to be ready for opportunities as well as hard knocks. Hearing their personal stories will help us learn to talk in the language that makes the most sense to them.

Finding 4: Risk Tolerance Varies, But Not Because of Gender

Risk tolerance is shaped more by life experience, personality, education, and situational factors than by gender.

Historically, financial advisers figured out an asset mix for their clients by asking them their risk tolerance. People who said they were the most risk averse were told to own a lot of cash and bonds and to avoid equities, while those who said they were risk tolerant were advised to own more stocks. In this way, investing in equity markets was seen as a proxy for risk tolerance. And men tended to own more stocks and were therefore seen to be less risk averse than women.

Thirty years ago, over 60% of US men invested in stocks compared to only 40% of women, leaving an “investment gap,” when it came to stocks, of at least 20 percentage points. According to more recent Gallup surveys, the gap is now smaller and narrowing fast. In the 2001–2008 period, the gap had slimmed to six points, when 65% of men and 59% of women owned stocks. By 2009–2017, it had narrowed even further, when 56% of men and 52% of women invested in equities.

By 2020, there will probably be no meaningful gender gap in stock market participation.

Implications

Perpetuating false stereotypes is dangerous. People of both genders have their own mix of risk-avoiding and risk-seeking tendencies. More importantly, how much risk anyone will take is based on how aware they are of all of their options in any given context.

If a woman has a financial adviser who relies on inaccurate judgments about women and risk, that adviser will end up guiding women to the wrong financial future.

My research has shown that if a woman is interested and an opportunity is aligned with her values, she will be motivated to take a risk. Then she will make either a financial investment, an investment in herself, or both.

Critically, advisers today need to ignore old myths about women and risk. We need to invite women and men of all ages to discuss their opportunities, their risks, and their investments.

When it comes to risk-taking, one size does not fit all. Each of us takes different types of risks at different times depending on our personal motivations. Our risk tolerance is relative to our life experience, unique personality, education, and situational factors.

In fact, the biggest risk most of our female clients will ever face is being pigeonholed into the wrong asset allocations due to inaccurate stereotypes.

All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Barbara Stewart, CFA, is a researcher and author on the issue of women and finance. She will release the ninth installment of her “Rich Thinking” series of monographs on International Women’s Day, 8 March 2019. Stewart is also a consultant who uses her proprietary research skills to help large global financial institutions seeking to transform themselves. She is a frequent interview guest on TV, radio, and print, and she is a columnist for Golden Girl Finance. Stewart is on the Advisory Board for Kensington Capital Partners Limited in Toronto. All of Stewart’s research is available on Barbara Stewart.

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